MSC Income Fund Q3 2026 Earnings Call Transcript

Quartr
Provided by Quartr
November 6, 2026

Key Takeaways

  • Positive Sentiment: Third-quarter results included adjusted net investment income of $0.34 per share ($0.36 before taxes), a 9.7% annualized return on equity, and NAV per share that rose $0.05 to $16.56. Management said the quarter also benefited from net fair-value appreciation, including an $11 million realized gain from exiting Core Transformers.
  • Positive Sentiment: The board declared total first-quarter 2027 dividends of $0.36 per share, unchanged from recent quarters; management cited a current yield above 11.5%. The adviser also permanently waived about $600,000 of third-quarter income incentive fees, while the fund and Main Street have each repurchased more than $2.5 million of shares under their plans.
  • Positive Sentiment: Management described the private-loan pipeline as well above average and said several transactions could close before year-end, potentially moving the fund closer to its target leverage profile. However, third-quarter private-loan investment activity was slower than expected, with investments declining by $11 million net; management noted that overall M&A activity has not yet picked up markedly.
  • Negative Sentiment: Adjusted NII before taxes was $16.3 million, slightly below the prior-year $17 million, and third-quarter income included $2.3 million of items management characterized as less consistent or non-recurring. Non-accrual investments were 1.4% of the portfolio at fair value and 5.2% at cost, while the fund also cited higher borrowing costs compared with a year earlier.
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Earnings Conference Call
MSC Income Fund Q3 2026
00:00 / 00:00

There are 12 speakers on the call.

Operator

Greetings and welcome to the MSC Income Fund third quarter earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Zach Vaughan. Please go ahead.

Speaker 1

Thank you, operator, and good morning, everyone. Thank you for joining us for MSC Income Fund's third quarter 2026 earnings conference call. Joining me today with prepared comments are Dwayne Hyzak, Chief Executive Officer, Nick Meserve, Managing Director and Head of the Private Credit Investment Group, David Magdol, President and Chief Investment Officer, and Cory Gilbert, Chief Financial Officer. MSC Income Fund issued a press release yesterday afternoon that details the fund's third quarter financial and operating results. The document is available on the investor relations section of the fund's website at mscincomefund.com. A replay of today's call will be available beginning an hour after the completion of the call and will remain available until November 13. Information on how to access the replay was included in yesterday's earnings release.

Speaker 1

We also advise you that this conference call is being broadcast live through the internet and can be accessed on the fund's homepage. Please note that information reported on this call speaks only as of today, November 6, 2026, and therefore, you are advised that any time-sensitive information may no longer be accurate at the time of any replay listening or transcript reading. Today's call may contain forward-looking statements. Many of these forward-looking statements can be identified by the use of words such as anticipates, believes, expects, intends, will, should, may, or similar expressions. These statements are based on management's estimates, assumptions, and projections as of the date of this call, and there are no guarantees of future performance.

Speaker 1

Actual results may differ materially from the results expressed or implied in these statements as a result of risks, uncertainties, and other factors, including but not limited to the factors set forth in the fund's filings with the Securities and Exchange Commission, which can be found on the fund's website or at sec.gov. MSC Income Fund assumes no obligation to update any of these statements unless required by law. During today's call, management will discuss non-GAAP financial measures, including adjusted net investment income, or ANII, and ANII before taxes. ANII is net investment income, or NII, as determined in accordance with U.S. generally accepted accounting principles, or GAAP, excluding the impact of capital gains incentive fee. ANII before taxes is NII as determined in accordance with GAAP, excluding the impact of the capital gains incentive fee and any tax expenses included in NII.

Speaker 1

MSC Income Fund believes that presenting ANII and ANII before taxes and the related per-share amounts is useful and appropriate supplemental disclosure for analyzing the fund's financial performance since the calculation of the capital gains incentive fee is based on realized gains and losses and unrealized fair value appreciation and depreciation, none of which are included in NII, and tax expenses included in NII may include excise tax expense, which is not solely attributable to NII, and deferred taxes, which are not payable in the current period. Please refer to yesterday's press release for reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures. Two additional key performance indicators that management will be discussing on this call are net asset value, or NAV, and return on equity, or ROE. NAV is defined as total assets minus total liabilities and is also reported on a per-share basis.

Speaker 1

MSC Income Fund defines ROE as the net increase in net assets resulting from operations divided by the average quarterly NAV. Please note that certain information discussed on this call, including information related to portfolio companies, was derived from third-party sources and has not been independently verified. Now I'll turn the call over to MSC Income Fund CEO, Dwayne Hyzak.

Speaker 2

Thanks, Zach. Good morning, everyone, and thank you for joining us. We appreciate your participation on this morning's call, and we hope that everyone's doing well. On today's call, we will provide you with the fund's key quarterly updates, after which we'll be happy to take your questions. Before we provide these updates, I want to start by congratulating Nick Meserve on his transition to Chief Executive Officer of the fund, effective on Monday, November 9, consistent with the fund's previous announcement in June. Nick currently serves as the head of the private credit investment strategy for Main Street and has served as a managing director for Main Street since 2012 and has been executing investments for the fund since it was founded.

Speaker 2

Nick has been a key member of our team and has been instrumental as we've grown the fund and focused its investments on the private loan strategy, and we're excited about the fund's bright future under Nick's leadership. Now turning to the fund's most recent operating results, we are pleased with the fund's performance in the third quarter, which resulted in an annualized return on equity of 9.7% and another increase in NAV per share. Based upon the quality of the fund's existing investment portfolio, together with its favorable liquidity position and current investment pipeline, we remain excited about our future expectations for the fund. The fund generated adjusted net investment income, or ANII, of $0.34 per share in the quarter, or $0.36 per share on a before-taxes basis.

Speaker 2

These results, combined with our positive outlook for the future, resulted in the fund's most recent dividend announcements, which I will discuss in more detail later. The fund finished the quarter with an NAV per share of $16.56, a $0.05 increase from prior quarter, and we continue to be pleased with the performance of the fund's investment portfolio. Corey will discuss the fund's financial results in more detail. The fund's private loan investment activity in the third quarter was slower than our expected normal quarterly activity and resulted in a net decrease in private loan investments of $11 million. Despite the slower investment activity, the fund remains highly focused on executing new investment opportunities that are consistent with its historical private loan investments as we work to grow the fund's investment portfolio.

Speaker 2

We're excited about the current private loan investment opportunities we're seeing, which I will discuss in more detail later. The fund also continues to focus on maximizing the benefits from its legacy lower middle market investment portfolio and eventually recycling this capital into private loan investments as investments are exited or repaid. Part of this focus, the fund continues to benefit from attractive follow-on investments in existing lower middle market portfolio companies, which we believe are beneficial to both current investment income and future value creation on these existing investments. Nick and David will cover the fund's investment activity in more detail.

Speaker 2

Based upon the fund's results for the third quarter, the fund's board of directors declared regular monthly dividends for the first quarter of 2027 of $0.11 per share, payable on each of January, February, and March, and a supplemental dividend of $0.03 per share, payable in March 2027, resulting in total dividends paid in the first quarter of 2027 of $0.36 per share, consistent with the fund's total quarterly dividends for each quarter since the fund's listing in January 2025. Going forward, the fund expects to maintain a dividend policy that provides for total quarterly dividends, which are expected to include regular monthly dividends and a quarterly supplemental dividend to be set at a level generally consistent with the fund's ANII before taxes per share.

Speaker 2

Based upon the total dividends payable for the first quarter of 2027 and the current stock price, the fund is currently providing its shareholders a dividend yield of over 11.5%. As we look forward to the fund's near-term investment activities, as of today, I would characterize the private loan investment pipeline as well above average. We are excited about the current pipeline of new investment opportunities and follow-on investment opportunities in existing portfolio companies, and we remain confident in our ability to generate attractive new private loan investment opportunities and grow the fund's investment portfolio over the next several quarters. Now turning to other activities intended to create value for the fund shareholders.

Speaker 2

In August, the fund entered into an open market share repurchase plan to repurchase the shares beginning in September 2026 through February 2027, at times when the fund shares are trading at predetermined levels below the fund's NAV per share. To date, the fund has repurchased over $2.5 million of its shares under this plan. As I noted earlier, we have a high level of comfort about the quality of the fund's investment portfolio, and as a result, we believe that this repurchase plan can be used to create additional value for the fund shareholders. My last few comments are reminders of the continued support the fund has received from Main Street Capital Corporation.

Speaker 2

Since Main Street's wholly owned subsidiary was appointed the sole adviser to the fund in October 2020, Main Street has purchased over $32 million of the fund's common stock and now owns over 5% of the fund. In conjunction with the fund's repurchase plan, Main Street also entered into a share purchase plan to purchase the fund shares, with the terms of such plan being identical to the fund's open market share repurchase plan, and with any open market share purchases being split by the fund and Main Street on a pro rata basis. To date, Main Street has purchased over $2.5 million of fund shares under this plan.

Speaker 2

As an additional show of support for the fund, Main Street, through its wholly owned investment adviser, voluntarily agreed to permanently waive approximately $600,000 of incentive fees on income earned for the third quarter to support the fund's resulting ANII before taxes per share, resulting in total incentive fees on income waivers of $2 million since the third quarter of 2025. We believe these actions demonstrate Main Street's commitment to the future success of the fund and reinforce Main Street's confidence in the strength and quality of the fund's investment portfolio and investment strategy. With that, I will turn the call over to Nick.

Speaker 3

Thanks, Dwayne, and good morning, everyone. We are pleased with the performance of the fund's private loan investment portfolio in the third quarter, which represents the largest portion of the fund's investment portfolio, and as a reminder, is the fund's sole focus with respect to new portfolio company investments. The overall operating performance for most of the fund's private loan portfolio companies continued to be positive, which contributed to the fund's third quarter financial results. The fund also benefited in the quarter from meaningful net fair value appreciation based upon the positive performance and outlook for certain private loan portfolio companies where the fund has an equity investment. A recent example of the benefits these portfolio companies can provide is the recent exit of the fund's equity investment in Core Transformers in the third quarter, which resulted in a realized gain of $11 million.

Speaker 3

At quarter end, 91% of the private loan portfolio was composed of secured debt investments, over 99% of which were first lien, and 95% of which were floating rate loans. The portfolio had an attractive weighted average yield of 10.5%, relatively consistent with prior quarter end. During the third quarter, the fund invested $61 million in the private loan portfolio, which after aggregate investment activity resulted in a net decrease of $11 million. The fund ended the third quarter with investments in 81 private loan portfolio companies, totaling $844 million of fair value and representing 61% of the fund's total investment portfolio at fair value. As Dwayne mentioned, our current private loan pipeline has continued to improve, both in terms of quality of the opportunities and the overall volume, and is now well above average.

Speaker 3

Since the end of the third quarter, we have closed one new private loan portfolio company and are optimistic we will close several more transactions before year end. With that, I'll turn the call over to David.

Speaker 4

Thanks, Nick, and good morning, everyone. In addition to the private loan portfolio that Nick covered, the fund also maintains a portfolio of legacy lower middle market investments. As a reminder, these are combined debt and equity investments in smaller, privately held companies, whereby the fund partnered directly with the company's existing business owners and management team through co-investments with Main Street Capital Corporation, utilizing the customized one-stop debt and equity financing solutions provided in Main Street's lower middle market investment strategy. After the listing of the fund shares on the New York Stock Exchange in January 2025, the fund no longer makes investments in new lower middle market portfolio companies, but continues to participate in follow-on investments in its existing lower middle market portfolio companies.

Speaker 4

We are pleased to report that the overall operating performance for most of the fund's lower middle market portfolio companies continues to be positive, which contributed to the fund's third quarter results. Despite the continued heightened level of uncertainty in the overall economy, we remain confident in the ability of these lower middle market portfolio companies to continue to successfully navigate the current environment. During the third quarter, the fund completed $4 million in total new lower middle market portfolio follow-on investments, which after aggregate investment activity resulted in a net decrease in the lower middle market portfolio of $10 million. At quarter end, the lower middle market portfolio had investments in 53 portfolio companies, totaling $503 million of fair value and representing 37% of the fund's total investment portfolio. Lower middle market portfolio at fair value is comprised of 54% debt investments and 46% equity investments.

Speaker 4

99% of those debt investments were first lien loans, and they had an attractive weighted average yield of 12.7%. The fund had equity ownership positions in all of its lower middle market portfolio companies, representing an average 8% ownership position. We expect these lower middle market investments will continue to provide significant benefits in the future, including the opportunity for continued dividend income, fair value appreciation, and eventually meaningful realized gains upon the future exit of these lower middle market investments. Finally, and consistent with prior quarters, we continue to see interest from potential buyers in several of the fund's lower middle market portfolio companies, which we expect will lead to favorable outcomes over the next few quarters. Turning to the fund's total investment portfolio as of September 30th, the fund continued to maintain a highly diversified portfolio with investments in 141 portfolio companies spanning across numerous industries and end markets.

Speaker 4

The fund's largest portfolio companies represented less than 4% of the total investment portfolio fair value at quarter end and less than 4% of the total investment income for the trailing 12-month period, with most portfolio investments representing less than 1% of the fund's income and assets. With that, I will turn the call over to Cory.

Speaker 5

Thank you, David, and thank you to everyone who has joined us today. The fund's total investment income for the third quarter was $35.5 million, relatively unchanged from the third quarter of 2025 and the second quarter of 2026. Interest income for the third quarter was also relatively unchanged from these prior periods. Interest income in the third quarter compared to the prior year was positively impacted by higher average levels of income-producing investment portfolio debt investments, partially offset by the negative impact from debt investments on non-accrual status and a decrease in interest rates. Interest income in the third quarter compared to the second quarter was positively impacted by one additional day of interest income in the quarter and higher average levels of income-producing investment portfolio debt investments, partially offset by the negative impact from debt investments on non-accrual status.

Speaker 5

Dividend income for the third quarter increased slightly from a year ago and was consistent with the second quarter. The increase in dividend income from the prior year was primarily due to an increase in dividends from private loan portfolio companies, partially offset by a decrease in dividends from lower middle market portfolio companies. In the third quarter of 2026, dividend income included $0.7 million of non-recurring items. As we previously discussed, dividend income will fluctuate quarter to quarter based on the underlying performance and capital allocation activities of the fund's portfolio companies and certain non-recurring items. Fee income for the third quarter was relatively unchanged from a year ago and decreased by $0.4 million from the second quarter. The changes in fee income from both the prior year and the second quarter were primarily due to a decrease in fees related to decreased investment activity.

Speaker 5

The third quarter included income considered less consistent or non-recurring in nature of $2.3 million, primarily related to interest and dividend income items. These items were $0.9 million higher than the third quarter of 2025 and $0.1 million higher than the second quarter and $0.7 million higher than the average of the prior four quarters. As we have previously discussed, these non-recurring items vary quarter to quarter and can include dividend income from equity investments and interest and fee income from accelerated prepayment, repricing, and other activity related to debt investments. The fund's expenses, net of waivers, for the third quarter increased by $1.8 million from the third quarter of 2025 and decreased by $2.2 million from the second quarter.

Speaker 5

The increase from the prior year was principally attributable to a $1.3 million increase in interest expense, a $0.9 million increase in the capital gains incentive fee accrual, and a $0.5 million increase in base management fee, partially offset by a $0.8 million decrease in incentive fee on income, net of waivers. The $2.2 million decrease from the second quarter in the fund's expenses, net of waivers, was primarily driven by decreases of $2.1 million in the capital gains incentive fee accrual and $0.4 million in incentive fee on income, net of waivers.

Speaker 5

The increase in interest expense from a year ago was largely driven by an increase in average borrowings outstanding used to fund the growth of the fund's investment portfolio and an increased weighted average interest rate on the fund's unsecured debt obligations as a result of the issuance of the May 2029 Notes and the issuance of the September 2029 Notes, partially offset by a decreased weighted average interest rate on the credit facilities due to decreases in benchmark index rates. The capital gains incentive fee accrual for the quarter was $0.9 million compared to no accrual a year ago and $2.9 million in the second quarter, with the variances due to the changes in the net fair value appreciation of the fund's investments in the third quarter of 2026 relative to the prior periods.

Speaker 5

The increase in base management fees from a year ago is the result of the fund's increased average total assets. The decreases in incentive fee on income, net of waivers, of $0.8 million from a year ago and $0.4 million from the second quarter is a result of a $0.5 million and a $0.4 million increases in the voluntary waiver of incentive fee on income by the fund's investment adviser, respectively, and a $0.4 million decrease in the gross calculated incentive fee on income compared to the prior year, primarily driven by a decrease in pre-incentive fee NII.

Speaker 5

The fund's expense ratio, calculated as the ratio of total non-interest operating expenses, excluding incentive fees, net of waivers, as a percentage of the fund's average total assets, was 1.9% on an annualized basis for the third quarter, a decrease from 2% in the prior year and consistent with the second quarter. The fund's adjusted NII before taxes in the third quarter was $16.3 million, or $0.36 per share, slightly decreasing from $17 million, or $0.36 per share, from the prior year. During the quarter, the fund recorded a net increase in the fair value of its investments of $5.2 million, representing the impact of $9 million of net unrealized appreciation, partially offset by $3.9 million of net realized losses.

Speaker 5

The net fair value increase was primarily attributable to an increase of $3.8 million in the private loan portfolio and $2.2 million in the lower middle market portfolio, partially offset by a decrease of $0.6 million in the residual middle market portfolio. Overall, the fund's operating results for the third quarter resulted in a net increase in net assets of $18.1 million, or $0.40 per share. The fund's NAV per share was $16.56, a $0.05 increase from the second quarter and $1.03 above the fund's public offering price per share in its public offering and listing on the New York Stock Exchange in January of 2025. As of quarter end, the fund had investments on non-accrual status comprising 1.4% of the total investment portfolio at fair value and 5.2% at cost.

Speaker 5

As of quarter end, the fund's regulatory asset coverage ratio was 2.16 and its net debt to NAV ratio was 0.83. Over the last few months, we have completed the actions we discussed last quarter to address the maturity of the fund's $150 million of October 2026 Notes. The fund issued $75 million in September and $75 million in October for a total of $150 million issued under the September 2029 Notes. In October, Kroll Bond Rating Agency also reaffirmed the fund's investment-grade issuer and senior unsecured debt rating of BBB- with a stable outlook. We remain confident in our ability to support the fund's growth in a way that reflects our conservative approach to the fund's capital structure. With that, I will now turn the call back over to the operator so we can take any questions.

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Kenneth Lee with RBC Capital Markets.

Speaker 6

Hey, good morning, and thanks for taking my question. Just around the pipeline there, the private loan pipeline, and the color of being well above average there. Once again, I apologize if this was covered in the other call. I've just been hopping around. Do you attribute the outlook there more to the network that you're seeing, the relationships, or is this just a signal of just broader markets kind of activity there? Thanks.

Speaker 2

Sure, Ken. Good morning, and we did cover it on the Main Street call, so you can get some additional details there, but I'll give you a couple of thoughts, and then Nick can add on. I would say that when we look at the pipeline, there's nothing specific we attribute it to. It's really right place, right time, and seeing a number of transactions that fit us well and that we also feel like we're a really good fit for. I don't know if I'd add anything different than that, Nick.

Speaker 3

Yeah, I'd say the volume does feel like it's picked up in the third, fourth quarter, and does that continue into 2027? I think we're hopeful, but I don't think we're seeing signs that M&A activity has picked up drastically from earlier in the year or anything yet.

Speaker 6

Gotcha. That's great. Just one quick follow-up, somewhat relatedly, in terms of the timeframes roughly for ramping up the portfolio more towards an optimal leverage level. Once again, I realize it can be a little difficult to predict, but just any updated thoughts around that. Thanks.

Speaker 2

Sure. We haven't given specific timeframes on that, Ken. I do think if the pipeline that Nick and his team are executing to and working on, if that actually gets to closing, we'll make a significant move in Q4. And obviously, beyond that, it really is going to be dependent upon the overall market and the transactions we see fitting us. I think we don't really have a change in terms of guidance or timing, but the pipeline right now will definitely be helpful in moving the fund closer to that target leverage profile.

Speaker 6

Great. Very helpful there. Thanks again.

Speaker 2

Thank you.

Operator

Our next question is from Arren Cyganovich with Truist Securities.

Speaker 7

Yeah. Maybe within the pipeline itself, are there any particular industries or themes that you could talk about in some of the aspects of spreads and documentation, anything notable in terms of what's going on within that pipeline?

Speaker 2

Yeah. I would not say there is anything from my perspective that is notable. It is just like our portfolio. It is diversified in terms of industry, geography, and types of companies, terms, conditions, kind of spread. They are all in line with what we have seen historically. Maybe some of the transactions are a little bit bigger than what we have had success with historically, but not out of line with what we have executed. I do not really see anything that is really different than historical. Nick, if you want to give some additional color.

Speaker 3

I would say spreads and terms are probably flat-ish since kind of the March, April timeframe. Before that, it widened out a little bit, but we are kind of in the same ballpark as we have been most of the year at this point.

Speaker 7

Great. Are these financing M&A? Are they refi, dividend recap? What is the bulk of those within the pipeline?

Speaker 3

I'd say most of our pipeline and most of our transactions all the time are going to be fresh LBOs, be a combination of a sponsor-sponsor or founder-sponsor.

Speaker 2

The only thing I might add, and Nick, you can add any additional color, we are seeing a healthy amount of follow-ons as well with our high-performing, well-performing portfolio companies that have the desire to go through acquisitions. We're seeing a number of opportunities there as well. That's probably a smaller part of the pipeline, but we are seeing that, which we view as a big positive.

Speaker 7

Thanks. Appreciate it.

Speaker 2

Thank you.

Operator

Our next question is from Chris Muller with Citizens Capital Markets.

Speaker 8

Hey, guys. Thanks for taking the questions. Can you just remind me on the September 2029 Notes, will both those tranches price the same, or is it dependent on where the market is when those get issued?

Speaker 2

They are both priced the same rate. It is just a kind of a delayed draw, delayed funding.

Speaker 8

Got it. Got it. I guess on the share buybacks, it sounds like that is a formulaic buyback. I guess, one, is that correct? Then two, how do you guys think about balancing buybacks with the above average pipeline that you guys mentioned?

Speaker 2

Sure. I think, Chris, it is a 10b5-1 plan, so it is kind of a grid that gets set and it does not move, and it is not executed by us. It is executed by a third party subject to that grid. So, it is what you described there on the buyback, and that applies both to what MSC Income Fund is doing and what Main Street is doing through its pro rata share of purchasing shares of MSC Income Fund. I think when you look at the second part, I think we are balanced between the two. We think both new investments, particularly given the attractive nature of the investments that we are seeing through the private loan pipeline, we think that is a great way to create value. We also think we can do the same thing through the repurchase plan. So we think both of them are good value creation opportunities or activities.

Speaker 2

We are looking to deploy both of those as we execute over the next couple of months.

Speaker 8

Got it. That is very helpful. Appreciate you guys taking the questions today.

Speaker 2

Thank you.

Operator

Our next question is from Paul Johnson with KBW.

Speaker 9

Hey, good afternoon. Thanks for taking my questions. In terms of kind of like the NII roll forward and just kind of thinking about that several quarters out and getting up to the distribution rate, $0.36 total dividends, what's sort of, I guess, the walk to get there? Obviously, we have higher rates, but we have some higher debt financing costs coming in, I guess, as well as, I guess, the fee waiver too. I don't want to forget that as well. There's a little bit of fee waiver support in there. So, I guess, how should investors be kind of thinking about the offset? Is it just simply from deployment, or do you see other things ahead as we get into next year, dividend income, fee income from investment activity, spreads? What do you kind of see as the bridge to NII eventually surfacing above that level?

Speaker 2

Sure. I think it is a combination of what you hit on there. I'd say the biggest driver is the new investment activity. So that's going to be the most direct catalyst. We do have dividend income, which continues to be a meaningful portion of MSC Income Fund's overall investment income, and that, as you know, is variable. But if we can continue to get good contributions from the lower middle market equity investments alongside growth of the portfolio. With the growth being concentrated in debt-only investments that have an immediate current return on them on the private loan side, that's the expectation of the path to continue to have NII grow and cover the $0.36 without the waiver.

Speaker 9

Got it. Thanks for that. And then, thinking about just the private loan portfolio, given just there's a different nature of those loans from your typical kind of lower middle market borrower structure. Do you believe that the private loan portfolio can benefit as much as kind of the lower middle market funnel does from just the sort of infrastructure beneficiaries, those types of companies that have been pretty successful in this environment, kind of pointing to Core Transformers this quarter? But there's clearly others in the portfolio, definitely in the Main Street portfolio. Does the private loan vertical, do you think, would that participate in sort of this same channel or same type of investments as much, or is it just a little bit less cyclical, I guess, in nature?

Speaker 2

Yeah, I would say that, and Nick can add on here, but I would say that the nature of the companies that we find attractive as a firm, whether it is lower middle market or private loan, I would say we find the same types of companies, industries attractive. So we have long been fans of infrastructure broadly, and that applies to both lower middle market and private loan. So I think we think those companies, those investments, particularly given the environment that we have been for the last couple of years, really since COVID-19, where you have got a combination of onshoring, reshoring activities, as well as just overall needs on the infrastructure, whether it is electric utility, oil and gas pipeline, or anything else that is related. Those are things that, again, Main Street for 30-plus years, we found those things attractive. We continue to find them attractive today.

Speaker 2

And that applies to both private loan and lower middle market. So I do not know if that answers your question, but Nick, if you have anything to add, feel free to add on, or if we did not answer your question, Paul, just ask it a different way.

Speaker 9

No, that answers my question. That is great. Thank you very much. That is all for me.

Speaker 2

Thank you.

Operator

Our next question is from Melissa Wedel with UBS.

Speaker 10

Good morning. Thanks for taking my questions today. A quick follow-up on your comments about the pipeline picking up a little bit in the fourth quarter. Is this just to clarify, on a gross basis or also on a net basis?

Speaker 3

I'd say we look at that on a gross basis. It's kind of where we adjust our look at the pipeline. But they will usually go hand in hand. As the gross origination picks up, usually you'll see a similar pickup on the repayment side.

Speaker 10

Got it. Then just a follow-up too on some comments, I think, from the Main Street call about expecting some lower middle market originations. To the extent there's any crossover between the two portfolios, is that something we should also be thinking about for the MSIF portfolio as well? Thank you.

Speaker 2

You are welcome. Just to make sure we are clear, on the existing portfolios, there is 100% crossover. There are obviously different allocations, but both lower middle market and private loan, what MSC Income Fund has as its investments, Main Street also has. Just to be sure on the lower middle market new investment side, in conjunction with the listing in January of 2025, MSC Income Fund, its sole strategy for new investment activities or investments in new portfolio companies is 100% private loan, no new lower middle market. Any lower middle market activity at MSC Income Fund, it is co-investments with Main Street, but they would only participate in follow-ons. They would not participate in any investments in new portfolio companies.

Speaker 10

Okay. Just to clarify, in terms of realizations in the Main portfolio, those would also be occurring naturally in the MSIF portfolio?

Speaker 2

They would, with the caveat that Main Street has some lower middle market investments that MSC Income Fund does not. That is a result of two things. One, Main Street has been around longer than MSC Income Fund, so anything that existed from a new investment standpoint prior to MSC Income Fund's existence, which we have some of that, because Main Street maintains a long-term to permanent holding period, those investments clearly would not be in MSC Income Fund. There was a time period during the COVID-19 pandemic time period where MSC Income Fund was not investing at all. Main Street continued to invest throughout that time period, so there are some investments that Main Street made during that time period that MSC Income Fund is also not in. But everything MSC Income Fund has, Main Street has, it just does not apply the other direction.

Operator

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question is from Mickey Schleien with Clear Street.

Speaker 11

Yes, good morning, everyone. The MSIF portfolio declined by $11 million at cost, and it grew $10 million in the previous quarter. That is a trend we have seen pretty much across the BDC space in the third calendar quarter. What are your thoughts on what caused that trend in terms of underlying themes?

Speaker 2

Yeah, Mickey, thanks for the question. I would say we cannot really comment on the industry as a whole. We can give you our thoughts. But I would say in general, it is likely the result of just a continued subdued or less active overall private equity investment environment. We saw that, have seen that for the last couple of quarters. I think the space as a whole has seen that, and I think that is what I would attribute the Q3 activities to. Again, Nick, if you have a different view, add on any additional color.

Speaker 3

Yeah, the only thing I would add is there were a few random deals that just did not come our way during the quarter. If one or two of those tipped our direction, it would have been a probably different net basis than what we ended up with. I would say the randomness of origination is you do have some that gets moved quarter to quarter. It might push into fourth quarter versus third quarter, or we lose the finish line and just do not get to the finish line of that transaction.

Speaker 11

I understand. You had $9 million of realized losses on a private loan restructuring and $6 million on an LMM exit. But at the same time, your non-accruals did decline a little bit. Can you provide more color on the restructuring loss and the LMM exit?

Speaker 2

Yeah, in general, I'd say the lower middle market loss was a longstanding company we had been involved in, had underperformed for a long time. We took the pain in terms of unrealized depreciation a long time ago, probably during COVID, from best of my recollection or memory. We finally had the opportunity after working through that investment, and we got a good outcome relative to where we were during COVID in terms of cash payments over the last couple of years and then the eventual exit. But we finally got to the point this quarter where we got to a resolution to wrap that up, and you see the realized loss come through as a result of that. On the private loan side, it was a mix of one exit that was a gain. I think Nick touched on that in his script or his prepared comments.

Speaker 2

We had a couple of others that were restructuring-related activities that took place in the quarter.

Speaker 11

Fair enough. Dwayne, the fund has relatively low exposure to software, but we're hearing again by many BDCs that deal terms in that sector are becoming a lot more interesting, given the perception of risk in that sector. How are you viewing that opportunity? Is it a fit for MSIF, and are these economics interesting enough for you to dive in a little bit more?

Speaker 2

Yeah, I would say each situation's going to be different. We may look at some of that, but in general, software doesn't fit us. High leverage, high valuations, or companies that don't produce EBITDA cash flows, those items don't fit us. They have never fit us, and I'd say they really wouldn't be a good fit for us going forward, and that's across the Main Street platform.

Speaker 11

Okay. Lastly, we have seen this amazing continued spread compression in the BSL market, while some direct lenders, including yourself, have reported stable or even wider spreads on new originations. Those markets are diverging. With the tight BSL, how does the tight BSL market impact your interest in further investment in the CapTrin JV, given that my understanding is it is sort of a first out, more plain vanilla portfolio?

Speaker 3

Yeah, I would say the broad syndicated market just does not It impacts us to some degree, but it is not a competition in the sense that our borrowers and the size that we are playing in the $10 million-$30 million EBITDA range, their option is not to go hit the broadly syndicated market. We will see that end up much more on the upper middle market than you would in the lower market private credit side. The JVs, I think probably is a different business and not related to us.

Speaker 11

Okay. I understand. That is it for me this morning. Thank you for taking my questions.

Speaker 2

Thank you, Mickey.

Operator

Thank you. This concludes today's question and answer session. I would now like to hand the floor back over to management for any closing remarks.

Speaker 2

Just want to say thank you again, everyone, for joining us today. We appreciate your support of the fund, and we look forward to talking to you again in February.

Operator

Thank you. This concludes today's call. You may disconnect your lines at this time. Thank you again for your participation.

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